Over USD 100bn could be invested in Russia's offshore, LNG and tight oil projects by 2025, says Wood Mackenzie

Wood Mackenzie’s latest upstream analysis, released on Tuesday, observes that Russia needs to re-focus investment from easier conventional onshore projects to more difficult and expensive tight oil, LNG and Arctic developments to maintain production in the longer-term. Russia accounts for 15 per cent of global oil and gas production, but only 7 per cent of total capital expenditure (CAPEX). These projects have a much higher cost base and will require a step change in investment and involvement from international oil companies to accelerate development.

Ian Thom, head of Russian upstream research for Wood Mackenzie, told the audience at the Exploration, Production and Processing (EPP) conference in Moscow on Tuesday: “Tight oil, LNG and Arctic projects (in Russia)... have a much higher cost base and greater technical complexity... a significant increase in international investment is required to promote development and realise the production potential from these areas. Over the next 3-5 years we expect significant growth in offshore exploration, progress with pilot projects in tight-oil activity and improved definition of LNG projects. This could result in more than USD 100bn of development CAPEX being invested in these resource themes by 2025.”

“By every measure, the Russian upstream sector is dominated by indigenous companies," Thom added. "Gazprom and Rosneft control the vast majority of Russia’s reserves, production, upstream value and net acreage – with international oil companies (IOCs) barely registering in the top ten. But Russia is looking to attract more foreign investment and we believe that it will seek more foreign investment to help exploit its high cost and high risk reserves. Sizeable tax breaks have been introduced, to help balance the huge costs involved in LNG, tight oil and Arctic offshore developments. We see this as a key step in attracting greater levels of investment and involvement from the majors”.

According to the Wood Mackenzie representative, oil majors see Russia as a long-term hub for oil and gas exploration and they have been active there over the past two decades via production sharing agreements (PSAs), conventional onshore projects and, more recently, offshore projects, tight oil and LNG. IOCs have signed several cooperation agreements in these areas in the past four years and the next 3-5 years will illustrate the scale of the next wave of investment.

Also worthy of note is the participation of Asian companies in Russian projects since 2006, which Thom said is a result of their growing resource demand and ability to finance upstream activity. “This has gathered pace as Russia looks to sell more oil and gas into China and the wider Asia Pacific market. This year has been pivotal with CNPC successfully acquiring a stake in the Yamal LNG project. This is a huge vote of confidence in Russia. We expect to see other Asian companies taking on high cost onshore projects and non-operated positions in LNG, offshore and tight oil,” Thom explained.